The Expert Group on Climate Obligations of Enterprises is comprised of experts, listed here, in international, environmental, tort, human rights and company law. It has worked for several years to formulate the Principles on Climate Obligations of Enterprises, based on its interpretation of the law as it stands or will likely develop. It is a follow-up project to the Oslo Principles, which were launched at King’s College London in 2015. The Expert Group hopes to spur a concrete debate on the responsibilities of individual entities and contribute to addressing the threats posed by climate change. The Sabin Center for Climate Change Law has not endorsed these enterprise principles, but is publishing a guest blog by their authors in order to stimulate further discussion.

The need to discern concrete obligations of major players

The challenges posed by climate change to humankind and the environment are unprecedented. Greenhouse Gas (GHG) emissions must be curbed globally in the very short term; otherwise, the future looks grim. There is broad consensus that in order to limit these consequences to ‘acceptable’ levels, global warming must be limited to below 2°C.

Notwithstanding the severity of this challenge, there is still little discussion about a concrete and enforceable distribution of the GHG emissions that must be reduced in order to achieve this imperative. The Oslo Principles (OP) aimed to map the legal obligations of States in the face of climate change. The Principles on Climate Obligations of Enterprises (EP), issued by a group of experts from all continents, discern the obligations of enterprises and investors based on the group’s interpretation of the law as it stands or will likely develop. In doing so, they aim to complement the OP in spurring a concrete debate on the responsibilities of individual players.

Legal Basis

The legal basis of the EP is an amalgamation of international, human rights, tort and environmental law – international conventions, domestic legislation, case law and legal doctrine – and numerous codes of conduct or governance.

In general, enterprises should reduce the greenhouse gas emissions over their activities to the same extent as the country or countries in which those activities take place. Hence, the burden will primarily be carried by enterprises in developed countries.

The GHG emission reduction obligations of States are determined on the basis of the OP. Under the OP, the global ‘carbon budget’ is determined each year on the basis of the precautionary principle and the 2°C threshold. It is divided over countries on a per-capita basis; the permissible emissions are divided by the world’s population. The resulting figure is the permissible quantum per person. That is multiplied by the number of inhabitants of a specific country. The resulting figure is the carbon budget of that country (the permissible quantum of GHG emissions). There will be two categories of countries: countries that exceed their carbon budget (Above Permissible Quantum (APQ) countries) and countries that emit less than their carbon budget (Below Permissible Quantum (BPQ) countries). APQ countries are, barring exceptions explicated in several Principles, required to reduce their emissions to the permissible quantum within one year. This reduction obligation, expressed in a percentage, extends to the activities of enterprises in that APQ country. BPQ countries do not have any primary GHG emission reduction obligations, but do have some no-cost and other obligations; the same goes for enterprises in BPQ countries. These obligations (to take all reduction measures where no additional cost or where offset financially) apply to all countries and enterprises.

It is of course desirable that the primary reduction obligations of enterprises can be adapted; countries may do so on basis of the factors mentioned under Principle 3 and 4. We do realise that there can be situations in which enterprises cannot comply with their obligations due to legitimate reasons; they may then compensate by taking countervailing measures or providing technical or financial means to another enterprise or country. If that would be unreasonably burdensome, a period of grace is allowed under some conditions (Principles 12 and 13).

Global enterprises (in particular multinationals listed on the major stock exchanges) have a further-reaching responsibility to reduce GHG emissions. That is also underlined by numerous codes of governance and guidelines. Due to their global nature, these companies mostly have more lobbying power to influence policy, a larger carbon footprint and more opportunities to reduce emissions due to larger financial capacity and more diversified operations. In our view, the fairest way to quantify this further-reaching responsibility is to align their reduction obligations over their activities in BPQ countries to the reductions that need to be achieved by the world at large in a given year (Principle 5). The reduction obligations over their activities in APQ countries remain the same.

Other obligations of enterprises

Next to the primary obligations to reduce emissions from the enterprise’s activities to a certain percentage, the enterprises must avoid carrying out activities and/or making available products or services that cause excessive GHG emissions (Principles 9 and 10). Some activities, such as operating coal-fired power plants, extracting oil from tar sands and fracking to obtain shale gas, are so GHG-intensive that they are in principle excessive. In less obvious cases, emissions will be excessive if they are higher than those of competitors or if more efficient choices could have been made at affordable cost. Affordable cost leaves enough room to cope with the different situations of APQ and BPQ countries.

Enterprises must also ascertain and take into account the emissions of their suppliers (Principle 17): how the emissions of suppliers compare to alternative suppliers should be seriously investigated by the buying enterprise and the results of this investigation have to be reflected in the final choice.

Disclosure

The EP also give considerable attention to several principles on disclosure (Principles 18-23). The physical and financial vulnerability to climate change as well as the enterprise’s actions to increase its resilience must be evaluated and publicly disclosed. Moreover, the enterprises must disclose their performance on these principles, as well as the GHG emissions from its products and services in comparison to competitors. These disclosures should however be proportionate to the relevant products, services and enterprises concerned. An important disclosure obligation relates to enterprises engaged in fossil fuel production: they must assess the impact of future limitations, consistent with the “carbon budget” concept.

Obligations of investors

Adequate disclosure is especially relevant as it makes available vital information to investors and financiers. Climate change is also a financial issue, as enterprises are starting to state that they are already – at approximately 1°C of global warming – losing significant sums due to its effects. Those effects will only become more pronounced as climate change progresses. Consequentially, stock prices can be expected to fall and therefore impair investment portfolios. That hits pension funds especially, but also insurers, at their core, as they have a long-term responsibility towards beneficiaries. These kinds of investors therefore need to operate from a long-term perspective and, acting prudentially, need to use their power as investors to limit global warming to below 2°C. According to the Principles, investors should evaluate enterprise performance on climate change, justify investment in clear underperformers and wield their power to incentivise underperformers to improve (Principles 26-29).

In an ideal world, investors would only invest in enterprises and States that do enough to tackle climate change. In the short term, however, only a small number of enterprises and States belong to that category. Our principles attempt to combine two conflicting obligations: to operate from a long-term perspective and address climate change and to achieve an adequate return for current beneficiaries.

In general, investors must “ascertain and take into account” the emissions of (potential) investees and whether they comply with their obligations under these Principles (Enterprises) and the Oslo Principles (States). However, they may invest in a non-complying entity, on the condition that they provide a justification for doing so. A potential justification could be the above mentioned need to achieve an adequate return and/or lack of satisfactory alternatives. Investment in enterprises engaged in energy generation from excessively emitting fossil fuels requires a compelling justification. Investors that do keep investments in non-complying entities are required to promote compliance through the channels available to them. Finally, pension funds must disclose their investment portfolio and strategy on climate change as well as whether they have entrusted asset management to others, and if so, to whom and under which guidelines the asset management has been entrusted (Principle 30).

The flexibility that is necessary to allow investors to strike a balance between achieving adequate returns on the short-term and ensuring climate change is addressed (and their portfolios safeguarded) on the long-term lies in the justification that investors must provide if they invest in non-complying entities. For example, if investors successfully argue they must invest in industries which do not contain any complying entities in order to maintain a sufficiently diverse investment portfolio, they could justify their investments by investing in the best-performing non-complier.

Endorsements

The Principles are endorsed by – at the time of writing – 49 distinguished experts from all continents.

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Disclaimer

This blog provides a forum for legal and policy analysis on a variety of climate-related issues. The opinions expressed here are solely those of the individual authors, and do not necessarily represent the views of the Center for Climate Change Law.